High-Yield Credit Analysis

Question 1

Reasons why a company is rated below investment grade

Answer 1

High leverage
Weak operating activities (profitability)
Weak, limited, or negative cash flows
Firm management is poor
Lack of competitive advantage
Industry business cycle is volatile
Industry is in decline

Question 2

How is high yield analysis more in-depth than investment-grade analysis?

Answer 2

Issuer liquidity and cash flows
Projection of financial stability
debt structure
issuer's corporate structure
covenants
equity-like approach to high-yield analysis

Question 3

Sources of liquidity

Answer 3

Cash on balance sheet (internal liquidity)
cash flows from operation activities (internal)
lines of credit and/or commercial papers (external)

The first focus of high-yield analysis is on liquidity.
This includes cash and operation cash flows and lines of credit, equity issuance and asset sales

Question 4

Project of financial stability

Answer 4

2nd focus of high-yield analysis. Future earnings on income side should be analysed. On the expense side, capital expenditure, R&D and working capital (cyclical firms especially) should be analysed.

Question 5

Third focus

Answer 5

Debt Structure
High yield firms have multiple layers of debt with different seniority. including secured bank loans, second lien debt
senior unsecure debt
subordinated debt, convertible bonds
preferred stock

Question 6

Reasons why high-yield firm may especially have more secured debt relative to non-secured debt. Top-heavy

Answer 6

Secured debt could have lower borrowing costs

Investors require collateral due to risk

Question 7

Fourth Focus

Answer 7

Capital structure
some high-yield firms may use holding company structure with a parent and several operating subsidiaries

Analysis of corp structure will tell us where an issuer’s debt resides and how cash flows can move from parent to subsidiaries. upstream or downstream

Question 8

5th Focus

Answer 8

Covenants
Change of control put
restricted payments
limitations on liens
restricted vs unrestricted subsidiaries
maintenance covenants

Question 9

Important considerations of sovereign credit analysis

Answer 9

External liquidity and international investment position
-status of currency, external liquidity, external debt

Monetary flexibility
ability to use monetary policy, credibility of monetary policy, effectiveness of monetary policy transmission

fiscal performance, flexibility and debt burden

Question 10

Non-sovereign credit analysis

Answer 10

Majority of local government bonds are general obligation or revenue bonds
credit analysis of GO bonds is similar to sovereign debt analysis - focuses on per capita income, debt, tax base, demographics, net population growth and local infrastructure.
Analysis should look at volatility and variability of revenues during times of both economic strength and weakness.

Revenue bonds, which are issued to finance a specific project are riskier than GO bonds because they are dependent on single source of revenue.